I was, until recently, Economics Editor of The Telegraph. You can find my book - 50 Economics Ideas You Really Need to Know - here.

Five months on and Quantitative Easing still isn’t working

THERE was a moment in each of the Apollo missions – post Apollo 8 – when the spacecraft passed into lunar orbit and swung round the dark side of the moon. For a nail-biting few hours, the spacecraft would lose all radio contact with mission control in Houston. They knew when it was supposed to emerge from orbit, but likewise that if they had made any mistakes in their pre-launch calculations, the craft and its occupants might never have been heard from again.

Earthrise seen for the first time by human eyes, as Apollo 8 rounded the dark side of the moon

The sensation in the Bank of England at the moment is rather similar. Billions of pounds (almost £125bn to be precise) have been poured into the economy through quantitative easing (QE). The experts have a pretty good idea of what that money ought to do in the long run to bring the economy back to reasonable health, but it is still probably too early to see any convincing signs of it working. That, according to Charlie Bean, the deputy governor for monetary policy, will probably take around nine months.

Well, here we are, five months into the experiment, and evidence of its success is still mighty hard to come by. The theory is pretty clear. The Bank inserts the money into the economy, by buying bonds off banks and investors. That – step one – increases the stock of money in the economy by £125bn (since this is newly-created cash). Step two is that the investors then use that money to go out and spend on other investments, giving the economy a well-earned kick-start.

The problem is, according to the latest stats from the Bank, we haven’t yet even had any convincing signs that step one is working very well. All other things being equal, one would expect a £125bn injection to increase the amount of cash sloshing around the economy (the Bank calls this M4 – no relation to the motorway) by 7pc or more. But according to figures released this morning, the growth in the key measure of M4 (including complex and noisy things like hedge funds) tailed off in June, falling 0.6pc in June following a 0.2pc rise in May.

As you can see from this chart, provided by Fathom Consulting, the growth rate is hardly anywhere near the 7pc minimum you might expect given what the Bank is pumping into the economy. “It implies,” according to Fathom, “that banks are using some of the cash themselves and hoarding much of the rest.”

Meanwhile, lending to companies dropped significantly – a further sign of the crunch facing businesses which prompted the Chancellor’s rather bizarre verbal intervention at the weekend. As I remarked in my last blog, it all rather supports the view that banks are doing as their zombified relations did in the Japanese boom and sitting on the cash rather than using it or lending it out.

There is a healthy debate to be had over whether, on the one hand, this indicates that QE is pointless and should be cancelled as soon as possible or, on the other hand, whether it has merely not been carried out with enough force to yield any meaningful result. On the other hand (economists all have three hands as you know) is the Bean argument to be patient and wait for the money to take effect. My feeling is more sympathetic towards the second of these options – that there may still be room for a little more QE, but I freely admit that, this being the dark side of the economic moon, this involves a leap of faith rather than a clear idea of where it will leave us.

But my rationale is as follows: these money stats are hardly a warning bell for inflation. If anything, they hint that we are likely to be deeper entrenched in deflation than anyone properly admits at the moment. That truly is something to be avoided at almost any cost.

In the meantime, we await the moment when that spacecraft resumes transmission and informs us everything is back to normal again. Wishful thinking, of course. The next major episode to look out for will come next week, when the Bank’s Monetary Policy Committee finally decides whether it will extend QE to the next level of £150bn.